Policing of tax-haven money flows set to get new byte

Deepshikha Sikarwar, ET BureauAug 31, 2009, 08.30am IST

NEW DELHI: Turning the heat on tax havens used to route investments into the country, India is now examining a proposal that seeks to create a specialised information tracking system on the lines of Austrac—Australia's anti-money laundering agency.

The information system will collect data on the use of tax havens and abuse of Double Taxation Avoidance Agreements (DTAAs) by overseas investors entering India. It will also keep tabs on Indian investments abroad to ensure tax havens are not being used to bring that money back into the country. This mechanism, called round-tripping , is alleged to be used by some Indian entities to avoid tax on income from their investments in the country.

The Australian Transaction Reports & Analysis Centre (Austrac) is an anti-money laundering and counter-terrorism financing regulator and specialist financial intelligence unit. India already has a financial intelligence unit in place that keeps track of certain transactions, such as bank transactions of value exceeding Rs 10 lakh. But the income-tax department wants a dedicated agency to monitor the flow of investments from tax havens.

The proposal figured during discussions at the recent meeting of directors general and chief commissioners of income-tax , a tax department official said. The proposal has been mooted by an internal committee of the Central Board of Direct Taxes that was set up to examine investigation issues in abuse of tax havens and tax treaties.

Creation of such a unit becomes important in the backdrop of India looking to amend its tax treaties to expand their scope to include extensive information exchange or enter into specialised Tax Information and Exchange Agreements with tax haven countries. This special unit would be able to track the flow of investments from tax havens into India and also from treaty countries such as Mauritius, which enjoy special tax benefits. The idea is to closely monitor all cross-border transactions to ensure all taxes legally due to India are paid and action is taken in time, if tax is evaded.

The CBDT has set up a task force to look into information exchange with treaty countries. While India has already begun negotiations with Switzerland to amend its tax treaty, it also plans to amend other DTAAs for information exchange.